Market sentiment changes by the day and hour. But as I write, financial markets are starting to look just a bit better. The reason is embarrassing for believers in sound money.
The prevailing sense—and this could change tomorrow—is that the Federal Reserve is getting cold feet in its stated mission to crush inflation through interest-rate hikes.
Even if dangerous—loose money is a narcotic for financials—there is nothing surprising about this. Center-left commentators for weeks, writing in the most influential journals of opinion, have sent a clear message: Democrats should choose inflation over recession. Between the two, recession/depression is electorally more dangerous to the party, not just this November but in two years especially.
Such a message is an indication of the pressures against the Fed right now. They are being asked to cool their heels. Don’t go the way of Paul Volcker in 1979, who tamed inflation but brought on a grim recession at the same time. That’s what put Ronald Reagan in the White House and led to a long, dark night of the soul for the Democratic Party and all the policies it stands for.
They don’t want that history repeated.
This perspective shows that some people have learned nothing substantial from this history. The reason for the “malaise” of the late 1970s wasn’t just inflation alone. It was because inflation was dramatically outstripping economic growth. That evil combination is what imparts the feeling on the part of the public that they’re losing ground and gradually slipping toward poverty. It’s a feeling that inspires dramatic political upheavals.
That’s precisely where we are today, and that explains the current discontent among voters.
“American consumers have never been this pessimistic about the economy, with the University of Michigan consumer confidence index plunging to a record low, as soaring inflation erodes household purchasing power and threatens a cost-of-living crisis.
“The Michigan consumer sentiment index fell from a reading of 58.4 in May to just 50.0 in June, a record low. The dismal reading represents a month-over-month drop of 14.4 percent and a year-over-year decline of 41.5 percent.”
It’s Biden who is taking the hardest hit.
The distance between approval and disapproval is an astonishing 17.3 percent in the compost index of polls. That spells disaster at the polls in November. What looks like a chart with numbers actually means incredible public anger, the most we’ve experienced in more than 40 years. If these trends don’t dramatically reverse, and soon, there will be no stopping some fundamental regime change.
It stands to reason that the Fed can’t fix this alone, however. It isn’t enough merely to raise rates. The key to the Reagan Revolution was to provide a new perspective on the purpose of policy. The “supply side” idea was that the ticket out of the malaise wasn’t mere restriction and suffering, frugality and stringency, penuriousness, and pauperism.
The real solution is economic growth, which comes from unleashing enterprise. That was the reason for the emphasis on tax cuts and deregulation. This was the basis of the new dawn in America. And it was this that led the country out of the darkness and into the light.
Let’s take a look at how all of this panned out by overlaying the federal funds rate with inflation and economic growth. The relationship here is complex, replete with lags and ambiguities of cause and effect. But if you follow carefully, you can observe the unfolding of events and their causative forces at work.
This chart tracks the relationship between 1976 and 1993 and reveals the meaning of the Reagan Revolution.
![(Data: Federal Reserve Economic Data [FRED], St. Louis Fed; Chart: Jeffrey A. Tucker)](/_next/image?url=https%3A%2F%2Fimg.theepochtimes.com%2Fassets%2Fuploads%2F2022%2F06%2F27%2F2-JAT-2022.06.27-1200x422.png&w=1200&q=75)
The red line is inflation, and one can observe the gradual increase leading to the incredible moments in late 1979 and early 1980 that pillaged the American savings pool and drove a growing sense of impoverishment. Economic growth (the blue line) was nowhere near making up the difference, so a huge gap separated purchasing power from productivity. That led to the electoral landslide.
Here you can also observe the work of Volcker at the Fed. The federal funds rate was tracking inflation closely on the way up until the real crackdown took place just as economic growth crashed and inflation was riding high. He pumped up the rates to exorbitant highs, all in an effort to squeeze excess liquidity out of the system.
We can see that the inflation rate started to respond downward with a lag. But that alone is insufficient to make a difference in shifting the public mood. The key to inspiring a new hope is to bump up the blue line of economic growth to get it consistently above the red line of declining purchasing power. This is what generates public optimism.
At the very time that Volcker was making the tough choices, the Reaganites got to work on the supply side. They codified and expanded deregulation in many sectors including energy, transportation, and communications. Crucially, they hammered away at the tax code with one important principle: the less wealth creation is punished, the more of it will take place.
By 1983, we can observe the shift. Fed policy was still very tight but it did not discourage enterprise at all. Quite the reverse. Economic growth soared even as inflation was falling dramatically. This was the magic moment and the clearest indication that we were leaving the malaise of the late 1970s behind us.
Telling these tales today seems almost like ancient history. All public messaging we are getting from the Biden administration goes in exactly the opposite direction. Give up your luxuries. Pay high prices and be happy about it. The bad guys are all the enterprises around you. Inflation is the fault of big business. The only solution is to crack down on consumption and production.
This is an extremely toxic mix, and it renders whatever feeble efforts by the Fed to restrain price increases as nothing but an effort in the intensification of austerity. Pay more for your mortgage! Cough up for your credit card! Buy small houses and drive less! Live off the wind and the sun!
This path—tighter money plus restrictionism in production—leads to an inevitable disaster, virtually guaranteeing the worst inflationary depression of our lifetimes.
If the Fed is successful, what are we left with? Permanently higher prices that are getting worse at a slower rate in a market with shortages and weakness in every sector. This is the essence of Bidenomics. Why they imagine that this could lead to any other result than mass public revolt is beyond me.
People ask me all the time why the Biden administration is doing this. The only possible answer I can drum up is that these choices are rooted in bad ideology. They simply can’t think their way around the strange postulates that make up their embedded worldview. Even when the ideology is beaten to a pulp by reality, even when their polls are in the tank, even when the Biden administration seems on the verge of utter disgrace, ideological commitments still prevail.
Yes, even now, the Biden administration could turn things around with a new emphasis on wealth creation, enterprise, economic growth, deregulation, and freedom. It sounds like a complete fantasy that this would be possible even in the face of disaster. Ideology is a very hard nut to crack, and there seems to be no chance of that happening.
